Fisher Investments Editorial Staff
Geopolitics, US Economy

When News Isn’t Really New

By, 10/26/2011

Stocks gave back some of their recent gains Tuesday—though news was largely of the recycled fashion. Here’s a look at Tuesday’s major stories.

Europe Misses a Deadline. Again.

Last week, officials pushed the deadline for a eurozone rescue plan to October 26. But they appeared no closer to an agreement on Tuesday, making another delay likely.

Three items need agreement: bank recapitalizations, Greek debt haircuts and EFSF expansion. Officials reportedly agreed on a €108 billion recapitalization fund, available to banks that exhausted all private and state financing options. Private sector haircuts on Greek debt—still being debated—are expected at 50% to 60%, with participation remaining voluntary. But the EFSF is far from done. France and Belgium suggested the facility become a bank, making it eligible for ECB funding. Germany disagreed, instead proposing the EFSF insure some sovereign debt losses, lowering the likelihood credit default swaps get triggered—a plan Spain and Italy protested.

Maybe this gets sorted by Wednesday, though we rather doubt it. And missing such deadlines should be, by now, utterly expected. Fortunately, at this point, the risk to not meeting these self-imposed, arbitrary deadlines seems mostly political. Economically, there’s nothing special about October 23, October 26 or the November 3 G-20 summit. Plus, officials approved Greece’s latest aid tranche, buying time by removing the threat of an immediate funding crunch. So expect the gradual, politically charged approach to continue.

US Consumer Confidence Drops to 2-Year Low

The Conference Board’s consumer confidence level hit a two-year low in October—the lowest level since March 2009.

March 2009.

Now, that does not mean that because consumer confidence is at this level, we’re about to have a historic 12-month surge in stocks. Rather, it means consumer confidence says less than nothing about where stocks or the economy go next—ample data prove that.

What’s more, remember the adage, “Watch what they do, not what they say.” Confidence is down, yet retail sales rose 1.1% in September from a month earlier—the largest gain in seven months. And consumer spending is now (and has been for many months) at all-time highs. Consumers may feel dour, but feelings and actions often don’t correlate.  

Texan Tax Talk

As election season kicks into high gear, politicians have begun trotting out their plans for “fixing” the perceived problem of the day—particularly taxes. By now, most are familiar with Herman Cain’s 9-9-9 plan, which would essentially eliminate the current tax code in favor of three flat, 9% tax rates—one on individuals, one on corporations and a national sales tax.

Tuesday, Texas governor Rick Perry joined the fray, announcing his Cut, Balance and Grow plan which consists primarily of a 20% flat tax.

At this point, there are myriad hurdles between either Cain’s or Perry’s plan and implementation, not least of which is first winning the Republican nomination—no small feat. Oh, then winning the general. And beyond that, there’s the intense battle that would ensue in Congress over such massively reformative plans—especially since the odds the Republicans win both the presidency and a filibuster-proof Senate majority are remote indeed.

That said, though, we find quite a bit to like in Perry’s plan—few would suggest the current tax code is a model of simplicity and common sense (at least not with a straight face). So a simpler code—in which individuals and families could allegedly file their taxes on a postcard-sized flier—would, in our view, be a good thing. One that likely encourages domestic investment and spending on goods and services aside from tax preparation.  

But if there’s a commonality among congressional actions, it’s a tendency to further muddy the waters, not simplify things. And recall, in an interconnected world, the impact changes to the US tax code have on global markets is likely not as big as we’d like to think. So for now, we’re not holding our breaths—or removing tax prep software from our laptops.

(Rule-)writers’ block

Embedded in the 2,000-page behemoth that is the Dodd-Frank Act was a rule theoretically based on 1933’s Glass-Steagall Act. Named for the concept’s champion, former Fed Chairman Paul Volcker, the rule was envisioned to be a fairly simple effort limiting banks’ proprietary trading.

Since Dodd-Frank passed, the Volcker Rule has simmered on the back burner while regulators investigated how to draft it. And now, regulators are showing their work for public comment. Only problem is there isn’t much to comment on. Sure, there are 298 more pages of paper. (Mr. Volcker thought four would suffice—silly Paul!) But those 298 pages average 1.28 questions per page—for a total of 383.

But 383 isn’t even the full tally. You see, like Back to School economics professor Dr. Philip Barbay, who quizzed Thornton Melon (Rodney Dangerfield) with “only one question . . . in 27 parts,” regulators’ queries are segmented. All pieces included, the draft contains fully 1,347 queries. This comes after Dodd-Frank-mandated studies on the subject. Congress hopes to have all the questions—and their many parts—answered by January 13, 2012. Good luck. Either way, it seems increasingly likely the Volcker Rule becomes the Volcker (Sort-of) Rule.

But it seems even that moniker is in question. Among those disappointed by the draft is . . . Paul Volcker. Perhaps Congress should investigate, study and question the proposed rule’s name?

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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